AN OVERVIEW OF FINANCIAL SERVICES IN INDIAN CONTEXT

CASIRJ Volume 6 Issue 7 [Year - 2015] ISSN 2319 – 9202
International Research Journal of Commerce Arts and Science
http://www.casirj.com Page 180
AN OVERVIEW OF Financial Services in Indian Context
Parvesh Kumar Goyal
Asssistant Professor, Department of Commerce,
Dayanand Post Graduate College, Hisar
ABSTRACT
Financial services are an essential segment of financial system. Financial services are
the foundation of a modern economy. The financial service sector is indispensable for
the prosperity of a nation. The Indian financial services industry has undergone a
major change since1990. Before its emergence the commercial banks and other
financial institutions dominated the field and they met the financial needs of the Indian
industry. It was only after the economic liberalisation that the financial service sector
gained some prominence. Now this sector has developed into an industry .In fact, one
of the world’s largest industries today is the financial services industry.
Keywords Financial services, Industry, Companies, Finance, Institutions
Introduction
Financial services refer to services provided by the finance industry. The finance industry
consists of a broad range of organisations that deal with the management of money. These
organisations include banks, credit card companies, insurance companies, consumer finance
companies, stock brokers, investment funds and some government sponsored enterprises.
Financial services may be defined as the products and services offered by financial institutions
for the facilitation of various financial transactions and other related activities. Financial services
can also be called financial intermediation. Financial intermediation is a process by which funds
are mobilised from a large number of savers and make them available to all those who are in
need of it and particularly to corporate customers. There are various institutions which render
financial services. Some of the institutions are banks, investment companies, accounting firms,
financial institutions, merchant banks, leasing companies, venture capital companies, factoring
companies, mutual funds etc. These institutions provide variety of services to corporate
enterprises. Such services are called financial services. Thus, services rendered by financial
service organisations to industrial enterprises and to ultimate consumer markets are called
financial services. These are the services and facilities required for the smooth operation of the
financial markets. In short, services provided by financial intermediaries are called financial
services.

Characteristics
 Intangibility: Financial services are intangible. Therefore, they cannot be standardized or
reproduced in the same form.
 Perishibility Like other services, financial services also cannot be stored. They have to
be supplied when customers need them.
 Variability: In order to cater a variety of financial and related needs of different
customers in different areas, financial service organisations have to offer a wide range of
products and services. This means the financial services have to be tailor-made to the
requirements of customers. The service institutions differentiate their services to develop
their individual identity.
 Labour Intensive: Financial services are labour intensive. It requires competent and
skilled personnel to market the quality financial products.
 Information based: Financial service industry is an information based industry. It
involves creation, dissemination and use of information. Information is an essential
component in the production of financial services.
Importance of Financial Services for Indian Economy
The successful functioning of any financial system depends upon the range of financial services
offered by financial service organisations. The importance of financial services in Indian
economy may be understood from the following points:
1. Economic growth: The financial service industry mobilises the savings of the people, and
channels them into productive investments by providing various services to people in general
and corporate enterprises in particular. In short, the economic growth of any country depends
upon these savings and investments.
2. Promotion of savings: The financial service industry mobilises the savings of the people by
providing transformation services. It provides liability, asset and size transformation service by
providing huge loan from small deposits collected from a large number of people. In this way
financial service industry promotes savings.
3. Capital formation: Financial service industry facilitates capital formation by rendering
various capital market intermediary services. Capital formation is the very basis for economic
growth.
4. Creation of employment opportunities: The financial service industry creates and provides
employment opportunities to millions of people all over the world.
5. Contribution to GNP: Recently the contribution of financial services to GNP has been
increasing year after year in almost countries.

6. Provision of liquidity: The financial service industry promotes liquidity in the financial
system by allocating and reallocating savings and investment into various avenues of economic
activity. It facilitates easy conversion of financial assets into liquid cash.
Scope of Financial Services
The scope of financial services is very wide. This is because it covers a wide range of
services. The financial services can be broadly classified into two categories:
(a) Assets/fund based services and
(b)Non-fund services (or fee-based services)
Fund based Services
A. Asset/Fund Based Services
1. Equipment leasing/Lease financing: A lease is an agreement under which a firm acquires a
right to make use of a capital asset like machinery etc. on payment of an agreed fee called lease
rentals. The person (or the company) which acquires the right is known as lessee. He does not
get the ownership of the asset. He acquires only the right to use the asset. The person (or the
company) who gives the right is known as lessor.
Regulatory frame work for Leasing in India
As there is no separate statue for leasing in India, the provisions relating to bailment in the Indian
Contract Act govern equipment leasing agreements as well section 148 of the Indian Contract
Act defines bailment as:
“The delivery of goods by one person to another, for some purpose, upon a contract that they
shall, when the purpose is accomplished, be returned or otherwise disposed off according to the
directions of the person delivering them. The person delivering the goods is called the „bailor‟
and the person to whom they are delivered is called the „bailee‟.
Since an equipment lease transaction is regarded as a contract of bailment, the obligations of the
lessor and the lessee are similar to those of the bailor and the bailee (other than those expressly
specified in the least contract) as defined by the provisions of sections 150 and 168 of the
Indian Contract Act
2. Hire purchase and consumer credit: Hire purchase is a transaction where goods are
purchased and sold on the condition that payment is made in instalments. The buyer gets only
possession of goods. He does not get ownership. He gets ownership only after the payment of the
last instalment. If the buyer fails to pay any instalment, the seller can repossess the goods. Each
instalment includes interest also.

Legal framework of Hire purchase transactions
The hire purchase system is regulated by the Hire Purchase Act 1972. In a hire-purchase
transaction, assets are let on hire, the price is to be paid in instalments and hirer is allowed an
option to purchase the goods by paying all the instalments. A Hire Purchase agreement usually
requires the customer to pay an initial deposit, with the remainder of the balance, plus interest,
paid over an agreed period of time.
3. Bill discounting: Discounting of bill is an attractive fund based financial service provided by
the finance companies. In the case of time bill (payable after a specified period), the holder need
not wait till maturity or due date. If he is in need of money, he can discount the bill with his
banker. After deducting a certain amount (discount), the banker credits the net amount in the
customer‟s account. Thus, the bank purchases the bill and credits the customer‟s account with the
amount of the bill less discount. On the due date, the drawee makes payment to the banker. If he
fails to make payment, the banker will recover the amount from the customer who has
discounted
The bill. In short, discounting of bill means giving loans on the basis of the security of a bill of
exchange.
4. Venture capital: Venture capital simply refers to capital which is available for financing the
new business ventures. It involves lending finance to the growing companies. It is the investment
in a highly risky project with the objective of earning a high rate of return. In short, venture
capital means long term risk capital in the form of equity finance.
Venture Capital in India
In India, the venture capital plays a vital role in the development and growth of innovative
entrepreneurships. Venture capital activity in the past was possibly done by the developmental
financial institutions like IDBI, ICICI and state financial corporations. These institutions
promoted entities in the private sector with debt as an instrument of funding. For a long time,
funds raised from public were used as a source of venture capital. And with the minimum paid
up capital requirements being raised for listing at the stock exchanges, it became difficult for
smaller firms with viable projects to raise funds from the public. In India, the need for venture
capital was recognised in the 7thfive-year plan and long term fiscal policy of the Government of
India. In 1973, a committee on development of small and medium enterprises highlighted the
need to foster VC as a source of funding new entrepreneurs and technology. VC financing really
started in India in 1988 with the formation of Technology Development and Information
Company of India Ltd. (TDICI) – promoted by ICICI and UTI. The first private VC fund was
sponsored by Credit Capital Finance Corporation (CCFC) and promoted by Bank of India, Asian
Development Bank and the Commonwealth Development Corporation, namely, Credit Capital
Venture Fund. At the same time, Gujarat Venture Finance Ltd. and AFIDC Venture Capital Ltd.

were started by state-level financial institutions. Sources of these funds were the financial
institutions, foreign institutional investors or pension funds and high net worth individuals.
Venture Capital Companies in India
IDBI Venture Capital Fund, ICICI Venture Funds Management Company, SIDBI Venture
Capital Scheme, IFCI Venture Capital Fund Limited, Venture East, Trident Capital, CANbank
Venture Capital Fund Ltd.
5. Housing Finance: Housing finance simply refers to providing finance for house building. It
emerged as a fund based financial service in India with the establishment of National Housing
Bank (NHB) by the RBI in 1988. It is an apex housing finance institution in the country. Till
now, a number of specialised financial institutions/companies have entered in the filed of
housing finance.
Housing finance institutions
1. National Housing Bank
The National Housing Bank was set up on July 9, 1988 as an apex institution to mobilize
resources for the housing sector and to promote housing finance institutions, both on regional
and local levels. It was established as a subsidiary of the RBI with a view to coordinating and
developing housing finance schemes.
II. Commercial Banks
Name of the Bank Name of the Housing Finance Company (Subsidiary
Companies)
(i) State Bank of India State Bank of India Housing Finance (SBIHF)
(ii) Punjab National Bank Punjab National Bank Housing Finance Ltd. (PNBHFL)
(iii) Andhra Bank Andhra Bank Housing Finance Ltd. (AHFL)
(v) Canara Bank Can Fin Homes Ltd. (CFHL)
(vii) Vijaya Bank Vijaya Bank Housing Finance Ltd. (VHFL)
(viii) Bank of India Indian Bank Housing Finance Ltd. (IBHFL)
III. Cooperative Banks
IV. Housing and Urban Development Corporation Ltd. (HUDCO)
V. Housing Development Finance Corporation (HDFC) and other Private Finance companies

VI. Insurance companies.
6. Insurance services: Insurance is a contract between two parties. One party is the insured and
the other party is the insurer. Insured is the person whose life or property is insured with the
insurer. That is, the person whose risk is insured is called insured. Insurer is the insurance
company to whom risk is transferred by the insured. That is, the person who insures the risk of
insured is called insurer. Thus insurance is a contract between insurer and insured. It is a contract
in which the insurance company undertakes to indemnify the insured on the happening of certain
event for a payment of consideration. The document which contains all the terms and conditions
of insurance (i.e. the written contract) is called the „insurance policy‟. The amount for which the
insurance policy is taken is called „sum assured‟. The consideration in return for which the
insurer agrees to make good the loss is known as „insurance premium‟. This premium is to be
paid regularly by the insured. It may be paid monthly, quarterly, half yearly or yearly.
Insurance services in India,
The main elements of the framework are the Insurance Act, 1938, Insurance Regulatory and
Development Act, 1999 and the Regulations framed under it by the Insurance Regulatory and
Development Authority (IRDA). The major players in insurance business are LIC(Life Insurance
Corporation of India ), GIC(General Insurance Corporation of India), HDFC Life Insurance
ICICI Prudential Life Insurance Max New York Life Insurance, SBI Life Insurance, Birla
Sunlife Insurance etc.
7. Factoring: Factoring is an arrangement under which the factor purchases the account
receivables (arising out of credit sale of goods/services) and makes immediate cash payment to
the supplier or creditor. Thus, it is an arrangement in which the account receivables of a firm
(client) are purchased by a financial institution or banker. Thus, the factor provides finance to the
client (supplier) in respect of account receivables. The factor undertakes the responsibility of
collecting the account receivables. The financial institution (factor) undertakes the risk. For this
type of service as well as for the interest, the factor charges a fee for the intervening period.
The main organisations operating in factoring services are SBI Factors and Commercial Services
(SBI FACS) Ltd. And CAN Bank Factors Ltd.
8. Forfaiting: Forfaiting is a form of financing of receivables relating to international trade. It is
a non-recourse purchase by a banker or any other financial institution of receivables arising from
export of goods and services. The exporter surrenders his right to the forfaiter to receive future
payment from the buyer to whom goods have been supplied. Forfaiting is a technique that helps
the exporter sells his goods on credit and yet receives the cash well before the due date. In short,
forfeiting is a technique by which a forfeiter (financing agency) discounts an export bill and pay
ready cash to the exporter. The exporter need not bother about collection of export bill. He can
just concentrate on export trade.

9. Mutual fund: Mutual funds are financial intermediaries which mobilise savings from the
people and invest them in a mix of corporate and government securities. The mutual fund
operators actively manage this portfolio of securities and earn income through dividend, interest
and capital gains. The incomes are eventually passed on to mutual fund shareholders.
Mutual Funds in India
In India the first mutual fund was UTI. It was set up in 1964 under an Act of parliament. During
the year 1987-1992, seven new mutual funds were established in the public sector. In 1993, the
government changed its policy to allow the entry of private corporate and foreign institutional
investors into the mutual fund segment. Now the commercial banks like the SBI, Canara Bank,
Indian bank, Bank of India, Punjab National Bank etc. have entered into the field. LIC and GIC
have also entered into the market. By the end of March 2000, there were 36 mutual funds, 9 in
the public sector and 27 in the private sector. However UTI dominated the mutual fund sector. In
India mutual funds are being regulated by agencies like SEBI. Mutual funds play an important
role in promoting saving and investment within the country. Some of mutual funds in India are
as follows:
UTI Mutual Fund ICICI Mutual Fund Kotak Mahindra Mutual Fund
HDFC Mutual Fund Reliance Mutual fund IDBI Mutual Fund
SBI Mutual Fund Tata Mutual Fund India Bulls Mutual Fund
Non-Fund Based/Fee Based Financial Services
1. Merchant banking: Merchant banking is basically a service banking, concerned with
providing non-fund based services of arranging funds rather than providing them. The merchant
banker merely acts as an intermediary. Its main job is to transfer capital from those who own it to
those who need it. Today, merchant banker acts as an institution which understands the
requirements of the promoters on the one hand and financial institutions, banks, stock exchange
and money markets on the other. SEBI (Merchant Bankers) Rule, 1992 has defined a merchant
banker as, “any person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to securities or acting as manager,
consultant, advisor, or rendering corporate advisory services in relation to such issue
management”.
Merchant Banking in India
Prior to the enactment of Indian Companies Act, 1956, managing agents acted as merchant
bankers. They acted as issue houses for securities, evaluated project reports, provided venture
capital for new firms etc. Few share broking firms also functioned as merchant bankers. With the
rapid growth in the number and size of the issues made in the primary market, the need for

specialized merchant banking service was felt. Grind lays Bank (foreign bank) opened its
merchant banking division in 1967, followed by Citibank in 1970. SBI started its merchant
banking division in 1972 and it followed up by setting up a fully owned subsidiary in 1980,
namely SBI Capital Markets Ltd. The other nationalized banks and financial institutions, like
IDBI, IFCI,
ICICI, Securities and Finance Company Ltd., Canara Bank (Can Bank Financial Services Ltd.),
Bank of India (BOI Finance Ltd.) and private sector financial companies, like JM Financial and
Investment Consultancy Services Ltd., DSP Financial Consultancy Ltd. have also set up their
merchant banking divisions.
2. Credit rating: Credit rating means giving an expert opinion by a rating agency on the relative
willingness and ability of the issuer of a debt instrument to meet the financial obligations in time
and in full. It measures the relative risk of an issuer‟s ability and willingness to repay both
interest and principal over the period of the rated instrument. It is a judgement about a firm‟s
financial and business prospects. In short, credit rating means assessing the creditworthiness of a
company by an independent organisation.
Credit rating agencies in India
 ICRA (Investment Information and Credit Rating Agency of India Ltd.)
 CARE (Credit Analysis and Research in Equities)
 CRISIL (Credit Rating Information Services of India Ltd.)
 SME Rating agency of India
3. Stock broking: Now stock broking has emerged as a professional advisory service. Stock
broker is a member of a recognized stock exchange. He buys, sells, or deals in shares/securities.
It is compulsory for each stock broker to get himself/herself registered with SEBI in order to act
as a broker. As a member of a stock exchange, he will have to abide by its rules, regulations and
by laws.
4. Custodial services: In simple words, the services provided by a custodian are known as
custodial services (custodian services). Custodian is an institution or a person who is handed
over securities by the security owners for safe custody. Custodian is a caretaker of a public
property or securities. Custodians are intermediaries between companies and clients (i.e. security
holders) and institutions (financial institutions and mutual funds). There is an arrangement and
agreement between custodian and real owners of securities or properties to act as custodians of
those who hand over it. The duty of a custodian is to keep the securities or documents under safe
custody. The work of custodian is very risky and costly in nature. For rendering these services,
he gets a remuneration called custodial charges. Thus custodial service is the service of keeping
the securities safe for and on behalf of somebody else for a remuneration called custodial
charges.

5. Loan syndication: Loan syndication is an arrangement where a group of banks participate to
provide funds for a single loan. In loan syndication, a group of banks comprising 10 to 30 banks
participate to provide funds wherein one of the banks is the lead manager. This lead bank is
decided by the corporate enterprises, depending on confidence in the lead manager.
A single bank cannot give a huge loan. Hence a number of banks join together and form a
syndicate. This is known as loan syndication. Thus, loan syndication is very similar to
consortium financing.
Challenges faced by Indian financial services sector.
Financial service sector has to face lot of challenges in its way to fulfil the ever growing
financial demand of the economy. Some of the important challenges are listed below:
1. Lack of qualified personnel in the financial service sector.
2. Lack of investor awareness about the various financial services.
3. Lack of transparency in the disclosure requirements and accounting practices relating to
financial services.
4. Lack of specialisation in different financial services (specialisation only in one or two
services).
5. Lack of adequate data to take financial service related decisions.
6. Lack of efficient risk management system in the financial service sector.
The above challenges are likely to increase in number with the growing requirements of the
customers. However, the financial system in India at present is in a process of rapid
transformation, particularly after the introduction of new economic reforms.
References
1. http://www.slideshare.net/NeelamPandey2/31352216-natureandscopeoffinancialservices
2. https://en.wikipedia.org/wiki/Financial_services
3. https://en.wikipedia.org/wiki/Category:Financial_services_companies_of_India
4. http://business.mapsofindia.com/finance/top-10-financial-services-companies-in-
india.html
5. Gupta S.K.(2014), Financial Institutions and Markets, Kalyani Publishers
6. Khan M.Y., Financial services Fourth Edition Tata McGraw Hill Publishing Company
Ltd.

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